Construction Business Loans – Everything You Need to Know
As a General contractor, you know that obtaining construction business loans is important to keep your business moving and operating in a fluid fashion. Construction businesses are not like a traditional brick and mortar business when it comes to cash flow cycles. Most payments do not come until at least 90 days after the project start date which makes loans for construction companies a necessity.
Most contractors do not get paid in full when they sell their product. As a contractor, you know that selling the job or winning the bid for a project is just the beginning of a long cycle of payments. When a new job is taken on many contractors receive a small down payment upfront and receive progress payments or tiered payments as the job hits certain milestones. This delayed payment structure makes obtaining construction business loans crucial to maintain positive cash flow.
What happens until the milestone gets met and how this affects cash flow?
Many contractors need to come out of pocket for many expenses like
- Payroll
- Material Costs
- Insurance
- Equipment
These expenses are crucial to keep your operations in order while completing the Job.
Why Take Out Construction Business Loans Instead of Going to Your Local bank?
The main reason is timing – Most bank Just take too long! When you go to a bank most closings don’t happen overnight.
Even if you try to avoid the timing issue by planning when you need it with the local bank many contractors that apply for a construction business loan with the local bank find out that without pledging collateral banks will more often then not decline a construction business loan due to contractors being placed in a high-risk bracket when it comes to traditional underwriting for construction business loans. At excel we understanding contractor loans. We worked with hundreds of contractors.
Why do Banks Decline Construction Business Loans?
There are a few reasons…
Primarily Four:
Most contracts do not have collateral
Construction is considered a high-risk industry by most banks
Bad Credit
Receivables are not for work complete but rather for progress made on a job thats in process. Therefore receivables can not be factored.
However, in the event that collateral and stellar business credit are present the application and approval process for a construction business loan can be very long and tedious. With underwriting times often taking as long as 3 months. When it comes to lending to contractors we understand how it can be frustrating to get approved for funding. That why we approve contractors in under 48 hours generally.
*For more information on common reasons why your business loan application might be declined, read: 3 Reasons Why Business Loan Applications Get Declined By Traditional Lenders and Alternative Financing Solutions.
But there’s good news– there are now many alternative non-bank lending options available when it comes down to lending for contractors which can be used to obtain the funding your construction business needs, whether it be for:
- New equipment
- materials purchases for an upcoming Job
- Payroll costs and new hires
- Paying bills
- Bidding on new jobs
- Past due business taxes
- Past Due Invoices
Whatever you need funding for, there are alternative lending options available to you which can get you the funds your construction business needs.
At Excel we have over a 90% approval rate when it comes down to lending to contractors since we have a specialty platform dedicated to underwriting construction business loans.
Construction business loans the alternative options:
So, what are your options?
Well, you’ve got a lot. And it all comes down to what you need the funds for.
As mentioned above, no matter what you need funding for, there are several options available for you. However, some loan options are designed for specific needs while others are more general.
Equipment Financing
Equipment financing is used to help you purchase whatever equipment your business needs to run smoothly.
The loan amount is dependent upon the type of equipment needed, as the repayment term is usually as long as the expected life of the piece of equipment.
Invoice Factoring
Invoice factoring is used for short-term cash flow issues, especially when your business doesn’t qualify for a traditional bank loan or any other alternative solution.
The lender will factor your business’ customer’s invoices to match your working capital needs.
This type of program is rarely used for contractors since progress payments cannot be factored. Factoring companies only use invoices for work complete. In the construction business, it typically happens this way.
Unsecured Business Loans
This Program was designed for business owners to enjoy the benefits of a Merchant Cash Advance who do not accept credit cards at there business. Most contractors do not receive credit card payments – and even if they do its typically a very small percentage of the annual gross sales.
This works as a purchase of future sale at a discount that is converted into a set payment. This payment is remitted via ACH usually daily, weekly or monthly.
This allows you to get construction business loans without any collateral just your sales.
Merchant Cash Advance
For those of you who accept credit cards at your business – Split funding, or a merchant cash advance, is a construction business loan based on a purchase of your future credit card sales at a discount.
Payments are collected at a set percentage of your credit card sales, which is nice because that means when business is down– so are your payments. And when there is no business– no percentage.
For that reason, this method really helps during a particularly volatile market or rough patch in your construction business.
Term Loans
Our fourth construction business loan option, term loans have a set repayment schedule and interest rate and mature between 1 to 10 years depending on the term of the loan.
However, keep in mind that this type of loan requires financial statements as well as 2 years of business history and one filed tax return.
Business Lines of Credit
A business line of credit is a rotating line of credit which you can dip into whenever the business needs it most.
Similar to a credit card, so long as you pay off your balance you can continue to use that line of credit continuously. Interest is then only paid off the amount that is used.
Asset-based Lending
Lastly, with asset-based lending, the assets of a business, such as inventory, accounts receivable, and other balance-sheet assets are used as collateral.
Plus, because this financing type is secured with collateral, interest rates tend to be low. Having applicable collateral also makes an asset-based loan easier to obtain.
What do I need to obtain a construction business loan?
Although alternative lender’s guidelines are not as strict as traditional bank and lending institution guidelines, they still take your credit score– and several other factors– into consideration when determining your eligibility.
For that reason, it’s important to know what those critical factors are so you can put yourself in the best position to be presented with an approval.
These are the “4 C’s of obtaining a business loan”:
Collateral
Typically, collateral comes in the form of property or liquid assets which are offered as a form of insurance in case you ever can’t pay the loan back. This is what people have come to be used to with bank loans, which are secured due to that collateral. Banks generally require collateral for construction business loans so be prepared.
However, alternative lenders are unsecured, meaning alternative lenders don’t typically take collateral as security for the loan.
Most Fintech, or alternative lending, products are only collateralized by your receivables and limited to business-related collateral, not personal.
Cash flow
The second ‘C’, cash flow is a critically important factor when applying for a loan.
Lenders like to see a healthy average ledger balance in the business account. And, if there are many returned or insufficient items in the account, lenders will often be reluctant to extend credit.
Capacity
Capacity refers to a track record of being able (or not) to make the revenue needed to pay back your loans.
This can be in the form of copies of contract invoices or a copy of your accounts receivable report.
Character
Lastly, the final ‘C’ character is determined by taking a look at the borrower’s personal credit history.
Some of the factors taken into account here are your total debt, delinquent accounts, available credit, and whether you’re making payments on time.
Keep in mind that even if you don’t satisfy each of the above factors, there are several other factors which alternative lenders take into consideration during the approval process.
But this is just one of the many benefits of alternative lending.
Why alternative lending?
In recent years, the way that banks lend money has changed.
It’s now far harder to obtain construction business loans or any type of loans for construction companies than it ever was before and the application and approval process is tedious and time wasting.
However, now alternative lenders have afforded business owners and contractors the chance to get the funding their business needs without having to jump through insane (and, frankly, outdated) hoops to get it.
Alternative lenders us more sophisticated algorithms for deciding the health of your business, taking into account much more than just your credit score (so don’t worry if you don’t have stellar credit), making it easier than ever to get the funding your construction business needs.
But the benefits of alternative lending don’t stop there:
- There’s often no personal collateral or guarantee required
- Minimum paperwork
- Poor credit accepted
- Repayment terms are flexible
- Fast processing
- No application fees
- Builds your business credit
- Funding in as little as 2 business days
How to obtain construction business loans
Ultimately, it’s up to you to do your research and find out what your best options are.
It’s your business and no one is going to look out for it like you will, so take the necessary steps to educate yourself and then take action to obtain the funding your business needs, whether that’s to keep things afloat or to take things to a whole new level.
Whatever the case, don’t let a lack of funding hold your business back from realizing it’s potential.
To apply for a construction business loan with Excel Capital, only four things are required:
- Four months of recent business bank statements
- Four months of business credit card processing statements
- A one-page application
- And just a few minutes to get started
We’ve made the process simple and straightforward so you can get back to what is most important– running your business.
Once everything is received, you can be presented with an approval and funded in as little as one business day– that’s right, just 24 hours.
Get the funding your contracting business needs by completing our short, 2-minute application.
We are experts in construction business loans – See the Excel difference for yourself.
Construction Business Loans – A Case Study
While the construction business is one of the oldest, most flourishing, and most competitive industries around, there comes a time when many of its business owners need access to working capital. The cost of equipment, materials, payroll, and slow turn-around rates trump the cash flow coming in, and many construction company owners find themselves weighed down by bills and overhead costs. Since the great recession of 2008, a traditional bank loan is no longer the go-to solution when it comes to acquiring capital. That old-school way of doing things sometimes ends in heartbreak due to waiting weeks just to receive an answer. That’s where the alternative financing industry comes into play!
With financing solutions such as the ever-popular Merchant Cash Advance, ACH Loan, Asset Based Loans, Equipment Financing, and more, access to working capital is easier than ever! There is no longer a stigma with taking a loan or any type of financing. Working capital is essential when it comes to growing a company of any kind, especially a construction company. Due to the cost of machines and equipment sometimes reaching well into hundreds of thousands of dollars, or the burden imposed by having contractors absorb the upfront costs when starting a job – such as the cost of construction materials like granite and wood – and not to mention, insurance costs and payroll for workers and employees, construction company owners should expect to reach out for capital at some point in their business’s lifetime. Some companies choose to do this more than once, and why not? If working capital is increasing your cash flow and allowing you to take on more jobs, it only makes sense to ask for more. Afterall, the goal most of us strive for is to ensure steady work flow and income for years to come.
Recently, Marty, a construction company owner from Georgia reached out to my company, Excel Capital Management. Marty was in a crunch and in need of funds, and he needed them fast! With a handful of projects on his plate, along with receivables due to a form on a large ongoing project not being paid on schedule, Marty asked us for working capital to be used towards the purchase of materials, construction equipment, licensing for projects to be completed, and payroll. As you know, only a small fraction of projects pay upfront and most only payout in tranches after certain milestones are hit at. When workers and office employees expect to be paid, and materials need to be purchased, waiting for these payouts is not an option. In order to get things back on track, as well as to generate new growth, Marty asked our sales rep, Jordan Lindenbaum, for help in securing an ACH Loan Product – a short term funding product paid on a daily or weekly basis by direct Automated Clearing House debits.
Marty’s situation was a tough one! He was owed close to $200,000 which was tied up and not coming in for at least thirty days, plus around $150,000 in retainage for completed contracts, however, that was going to be payed out over six months. He also had both a $2 million and a $1.5 million contract on the table respectively (both carrying a 20% gross profit), but those were not set in stone. Marty’s company had no time to wait with other projects lined up and needing to be completed by early 2016, however, they couldn’t be completed unless he had the means to hire more workers and purchase a few machines to keep up with the timelines in place. Obviously, without the aforementioned payouts, he was in a bind. To the Average Joe, these type of accounts receivable amounts seem amazing, but in the construction business, we know this revenue doesn’t always reflect the tangible finances. Most, if of not all, of the money is put back into the company to complete ongoing projects. Whether Marty could wait until his pay day or not – he needed some additional working capital, now.
After supplying us with a few bank statements, a business lease, his driver’s license, and a few other minimal stipulations, we were able to get Marty $80,000 in working capital in a matter of only two days! The daily repayment amount was only $400 per day – an ACH automatically debited (so Marty wouldn’t have to worry about making any large monthly payments – he could focus on his projects at hand) which would happen over the course of 12 months. It was as simple as that! No hassles or phone calls from banks, just a solid relationship with an alternative financing company, such as Excel Capital Management, and peace of mind.
Everyone needs a little help here and there, and there is no shame in asking for it. There’s more hope than ever for small to mid-sized businesses when it comes to acquiring working capital. Whether you need $5,000 or $5,000,000, there are options. Most of today’s top CEOs have taken loans or received working capital in order to grow their companies into multi million dollar corporations. You know the old saying. “It takes money to make money!” With our state of the art approval process loans for construction companies are one click away.
